Federal Reserve Credit surged $70.3bn last week to $2.169 TN (high since the
first week of January). Fed Credit has dropped $77bn y-t-d, although it expanded
$1.300 TN over the past 52 weeks (150%). Elsewhere, Fed Foreign Holdings of
Treasury, Agency Debt last week (ended 4/22) rose $6.5bn to a record $2.648
TN. "Custody holdings" have been expanding at a 16.9% rate y-t-d, and were
up $395bn over the past year, or 17.5%.

Total Commercial Paper outstanding slipped $1.7bn this past week to $1.472
TN. CP has declined $209bn y-t-d (41% annualized) and $314bn over the past
year (17.6%). Asset-backed CP dropped $9.9bn to $671bn (low since 12/04), with
a 52-wk drop of $1180bn (15%).

More signs of liquidity returning to the ABS market. Year-to-date total US
ABS issuance of $25.7bn (tallied by JPMorgan's Christopher Flanagan) is approaching
half of the $62.7bn from comparable 2008. U.S. CDO issuance of $20.9bn compares
to last year's y-t-d $13.0bn.

April 21 - Bloomberg (Timothy R. Homan): "Worldwide losses tied to rotten
loans and securitized assets may reach $4.1 trillion by the end of 2010...
the International Monetary Fund said. Banks will shoulder about 61% of the
writedowns, with insurers, pension funds and other nonbanks assuming the rest...
The fund projected losses of $2.7 trillion at U.S. financial institutions,
an increase from its estimates of $2.2 trillion in January and $1.4 trillion
in October."

April 24 - Bloomberg (Mark Pittman): "The Federal Reserve took on more than
$74 billion in subprime mortgages, depreciating commercial leases and other
assets after Bear Stearns Cos. and American International Group Inc. collapsed."

April 20 - Bloomberg (Simon Kennedy and Sandrine Rastello): "The International
Monetary Fund may be so conscious of having handed out bad advice to needy
countries in the past that it isn't offering them enough guidance now. The...
lender is combating the worst financial turmoil in its 64-year history with
more than $55 billion in loans for nations from Pakistan to Serbia. As the
fund prepares to lend even more, it is retreating from its practice -- carried
out with adverse effects a decade ago in Asia -- of demanding that governments
overhaul their economic systems in return for aid... 'The pendulum may be swinging
too far,' says Claudio Loser, former head of the fund's Western Hemisphere
department and now a fellow at the Inter-American Dialogue... There was a strong
perception that the IMF used to ask too much of countries. Now there is a major
danger it's moved too far in the direction of not setting enough conditions.'"

April 24 - Bloomberg (John Detrixhe): "Corporate borrowing costs fell this
week to the lowest since October amid signs that government efforts to repair
broken credit markets are working. The extra yield investors demand to own
corporate debt instead of Treasuries fell to 698 bps as of yesterday from the
December peak of 896 bps, according to Merrill Lynch..."

Government Finance Bubble Watch:

April 22 - Bloomberg (Michael McKee): "Millions of lost jobs mean billions
in lost tax revenue for the U.S. government, and billions in additional Treasury
debt to fund a federal budget deficit that may soar to more than four times
last year's record $454.7 billion... With spending on unemployment insurance
and other safety- net programs rising, the deficit is already at a record $956.8
billion six months into the fiscal year."

April 23 - Bloomberg (Andrew MacAskill): "U.K. government support for the
banking system has risen to 1.4 trillion pounds ($2 trillion) and may climb
higher as the financial crisis spreads to building societies and economists
warn lenders may need more aid. Prime Minister Gordon Brown's government...
offered to guarantee some mortgage-backed bonds, adding as much as 50 billion
pounds to the bailout that began with the collapse of Northern Rock Plc in
2007. The amount invested in, loaned to or pledged to back bank assets now
equals Britain's gross domestic product, or 22,800 pounds for every person
in the U.K."

April 20 - Bloomberg (Gonzalo Vina and Neil Unmack): "Chancellor of the Exchequer
Alistair Darling this week will introduce guarantees for mortgage-backed bonds,
allowing buyers to unload the securities at no loss, an effort to kick start
lending and wean U.K. banks off government aid, two people familiar with the
plan said. The Treasury will offer guarantees for about 50 billion pounds ($73
billion) of the securities through the new mechanism..."

April 22 - Bloomberg (Svenja O'Donnell and Brian Swint): "Britain's deficit
swelled to the largest since World War II and unemployment rose to the highest
in 12 years, highlighting the challenge facing Gordon Brown's government...
The gap almost tripled to 90 billion pounds ($117 billion) in the fiscal year
through March..."

April 23 - Bloomberg (Anchalee Worrachate): "The U.K.'s plan to sell a record
220 billion pounds ($318 billion) of gilts this year to revive the economy
may cause investor 'indigestion,' according to some of Britain's biggest bond
traders. The amount, 50% more than the 146.4 billion pounds sold in the fiscal
year that ended March 31, may be too much for the market to absorb, according
to Royal Bank of Scotland Group Plc. The issuance plan... is a 'surprise,'
according to Barclays Capital."

April 24 - Bloomberg (Daniel Tilles and Matthew Brown): "The U.K.'s top sovereign
credit rating may be at risk as the government's finances worsen, Moody's...
said. Britain's 'balance sheet is deteriorating rapidly, due to a combination
of weakening revenues and the accumulation of sizeable assets and contingent
liabilities as a result of successive bank bailouts,' analysts at Moody's led
by Arnaud Mares... wrote... 'The government is taking risks with public finances.'"

April 21 - Finacial Times (Lindsay Whipp, David Oakley and Michael Mackenzie): "Japan
is to issue an extra Y10,800bn ($110bn) of government bonds this fiscal year
to help it tackle its worst recession since the second world war. The bonds
will fund the bulk of the government's $154bn stimulus plan and will bring
its expected total new issuance for the fiscal year starting this month to
a record Y44,100bn, a 33% rise on last year. This comes as governments around
the globe are taking on record debt levels... The US is expected to issue about
$2,000bn in the fiscal year starting last October... The eurozone governments
are set to raise €800bn ($1,050bn) this calendar year, 23% up on 2008."

April 22 - Bloomberg (Emma Ross-Thomas): "The euro area's budget deficit widened
to the biggest in three years in 2008, with five euro members breaching the
European Union limit... The total budget shortfall for the euro region widened
to 1.9% of gross domestic product last year, the largest since 2005... France,
Spain, Greece, Malta and Ireland had deficits above the bloc's 3% limit."

Currency Watch:

The dollar index fell 1.5% this week to 84.71 (up 4.2% y-t-d). For the week
on the upside, the Swedish krona gained 4.1%, the South African rand 2.5%,
the Swiss franc 2.3%, the Japanese yen 2.1%, the Norwegian krone 2.0%, the
Danish krone 1.5%, and the Euro 1.5%. On the downside, the Mexican peso declined
1.6%, the South Korean won 0.9%, and the British pound 0.8%.

April 22 - Bloomberg (Shamim Adam and Kevin Hamlin): "China's economy will
expand faster than previously forecast this year and next as the government's
4 trillion-yuan ($586 billion) stimulus package spurs domestic demand and boosts
investment, Goldman Sachs Group Inc. said. The world's third-largest economy
will expand 8.3 percent in 2009, from an earlier estimate of 6%... economists
Helen Qiao and Yu Song wrote... CLSA Asia-Pacific Markets also increased its
estimate for growth this year to 7% from 5.5% earlier..."

April 23 - Bloomberg (John Liu): "China's trade surplus will swell to a record
$325 billion this year, boosting its foreign-exchange holdings and adding pressure
on the central bank to find an alternative reserve currency to the dollar,
ING Groep NV said. The gap will expand as lower prices help reduce the nation's
commodity import bill by $86 billion, Tim Condon, head of Asia research at
ING said..."

April 22 - Bloomberg (Tom Kohn): "China is attracting derivatives bankers,
who lost money in the U.S. last year for the first time, after trading in its
futures markets expanded 76%. 'We very much see China as a future market, as
many others do,' said Peter Weibel... chief executive officer for Asia at TriOptima...
'The derivatives market there is at an early stage. We want to be there from
the start.'"

April 23 - Bloomberg (Chua Kong Ho): "China's corporate profits fell 73% to
43.4 billion yuan ($6.4 billion) in the fourth quarter, Haitong Securities
Co. said... The report is based on 1,255 so-called A-share companies that have
released their results so far, Haitong said, and they make up 80% of the 1,602
businesses whose shares trade on the two mainland exchanges. Full-year profits
fell 14% to 706.09 billion..."

April 21 - Bloomberg (Dune Lawrence): "Beijing Sunshine Care House opened
in January 2008, seeking to attract the city's elderly with a tropical conservatory,
billiard room and calligraphy studio. By the end of this year, the retirement
home will triple the number of beds to 700... The world's third-largest economy
is aging so rapidly that by 2050, there may be only two working-age people
for every senior citizen, compared with 13 to one now."

Japan Watch:

April 22 - Finacial Times (Michiyo Nakamoto): "Japan suffered its first trade
deficit in nearly 30 years in the year to March... The trade deficit last year
reflects the sharp rise in commodity prices earlier in the year and the severe
contraction in exports... Exports in March fell 45.6 per cent year-on-year,
an improvement over the record 49.4% drop in February..."

India Watch:

April 21 - Bloomberg (Cherian Thomas): "India's central bank reduced interest
rates for the sixth time in as many months to a record low... The Reserve Bank
of India cut the reverse repurchase rate to 3.25% from 3.5%..."

Latin America Watch:

April 21 - Bloomberg (Jeb Blount): "Petroleo Brasileiro SA, Brazil's state-controlled
oil company, said it won't provide crude as collateral for loans from China
worth as much as $10 billion. Chinese companies will instead receive right
of first refusal on some future output as part of a deal being finalized between
Brazil and China's Development Bank, Petrobras CEO Jose Sergio Gabrielli said...
The... company, which announced the Americas' largest oilfield discovery in
three decades in 2007, is tapping overseas partners to help fund a $174.4 billion
five- year investment plan."

April 20 - Bloomberg (Andre Soliani): "Brazil will try to convert a promise
to lend more money to the International Monetary Fund into more say on how
the agency spends as much as $750 billion to rescue crisis-stricken nations,
a former IMF official said. 'The fact you become a potential creditor makes
your voice stronger,' Claudio Loser, head of the IMF's Western Hemisphere Department
from 1994 to 2002, said... 'Brazil has been pushing very hard, together with
countries such as India, China and Mexico, for the fund to better reflect the
importance of emerging economies.'"

April 24 - Bloomberg (Diana Kinch and Andre Soliani): "Brazil's unemployment
rate rose to 9% in March, the highest since 2007, the national statistics agency
said..."

Central Banker Watch:

April 21 - Bloomberg (Johan Carlstrom): "Sweden's central bank, the world's
oldest, cut the benchmark interest rate to a record 0.5% and said it's ready
to take further steps to revitalize the Nordic region's largest economy...
The... Riksbank, founded in 1668, lowered the seven-day repo rate by half a
percentage point..."

Real Estate Bubble Watch:

April 22 - Bloomberg (Dan Levy): "California and Florida metropolitan areas
led the U.S. in foreclosures in the first quarter... RealtyTrac Inc. said.
Las Vegas had the highest overall rate of foreclosure filings, with 4.5% of
households receiving a default or auction notice or being seized by a lender.
California had 13 cities among the top 25 with the highest rates. Florida had
eight while Nevada and Arizona each had two..."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

April 22 - Bloomberg (Katrina Nicholas and Abigail Moses): "Credit-default
swap dealers cut the volume of outstanding trades to $38.6 trillion last year
as they tore up overlapping contracts amid pressure from regulators to scale
down the privately negotiated market and reduce risk. Outstanding contracts
fell 38% in 2008, the... International Swaps and Derivatives Association said...
It's the first annual decline, after the market increased 100-fold over the
previous seven years as investors used the derivatives to protect against bond
losses and speculate on creditworthiness."

April 23 - Bloomberg (Jody Shenn): "The head of Greenwich Financial Services
LLC warned bond investors in Washington last month that government efforts
to reverse the housing slump are doing more harm than good by undermining debt
contracts. More than 30 money managers with stakes in the $6.7 trillion mortgage
bond market that underpins the real-estate industry heard Bill Frey's March
25 talk... Since then, a group of investors with home-loan bonds totaling more
than $100 billion have hired Patton Boggs LLP, Washington's biggest lobbying
law firm... Bondholders are preparing for a fight over legislation approved
last month by the House of Representatives that would shield companies that
collect homeowners' payments from lawsuits over modified mortgages, even if
new terms harm investors."

Unbalanced Global Economy Watch:

April 23 - Bloomberg (Mark Deen): "Chancellor of the Exchequer Alistair Darling
raised taxes on motorists, smokers and the rich as he forecast the worst recession
since World War II and the biggest budget deficit in the Group of 20 nations.
The Treasury will borrow 269 billion pounds ($392 billion) more in the next
five years fiscal years. It will drag in 3.2 billion pounds more from people
earning more than 100,000 pounds a year and 6 billion pounds on duties for
alcohol, tobacco and gasoline..."

April 24 - Bloomberg (Jennifer Ryan and Brian Swint): "The U.K. economy shrank
more than economists forecast in the first quarter in the biggest contraction
since Margaret Thatcher came to power in 1979. Gross domestic product fell
1.9% from the final three months of 2008 as manufacturing and business services
posted record declines..."

April 24 - Bloomberg (Scott Hamilton): "For British rats, the worst of times
has turned out to be the best of times. The vermin more associated with the
Dickensian era than modern Britain are thriving, with shuttered shops and half-built
housing sites to live in, rotting piles of uncollected garbage for dinner and
fewer exterminators sent out to kill them."

April 24 - Bloomberg (Emma Ross-Thomas): "Spain's unemployment rate rose to
17.4% in the first quarter, more than double the European Union average, as
the global recession ravages an economy that was once one of the region's strongest
performers."

Bursting Bubble Economy Watch:

April 22 - Associated Press: "The historic collapse of the American newspaper
industry was evident at every turn as the 2009 Pulitzer Prizes were announced.
One winner was laid off three months ago. Winning newspapers have eliminated
home delivery and editions to stay afloat. A photographer celebrated his victory
while lamenting the loss of colleagues who are about to be laid off. But Pulitzer
administrators said the winners, including stories that brought down two philandering
politicians, were a victory for old-fashioned watchdog journalism at a time
when the industry's very survival is in question."

April 20 - Wall Street Journal (Lavonne Kuykendall): "Insurers used to suggest
that home- and auto-insurance policies were fairly recession-proof, with drivers
and homeowners typically maintaining the same coverage each year... Not anymore.
Auto-insurance coverage quotes obtained online at insurance-shopping Web site
Insurance.com dropped an average $100 in March from six months earlier, the
result of drivers who are doing everything they can to cut their coverage to
the bone..."

April 16 - Bloomberg (Brendan Murray): "Poker champion Barry Greenstein says
it's getting harder to rake a buck. The U.S. recession and backlash against
executives' pay has reduced the number of rich amateurs willing to play at
$2,000-to $4,000-limit tables... His winnings are down by a third from a few
years ago. 'There's less loose money around,' said Greenstein... 'We used to
have a guy in the movie industry or some guy in the computer industry who had
money to blow who doesn't have that anymore.'"

California Watch:

April 23 - Bloomberg (Jeremy R. Cooke): "California bonds from the state's
largest taxable debt issue rose after yesterday's $6.85 billion sale... California
7.55% taxable, 30-year securities were sold to customers in $1 million-plus
blocks at prices as high as 105.3 cents on the dollar to yield 7.12%..."

New York Watch:

April 23 - Bloomberg (Oshrat Carmiel): "Home prices in the Hamptons, the oceanside
getaway of celebrities and Wall Street financiers, plummeted in the first quarter
as the financial crisis cut demand for vacation properties. The median price
fell 23% from a year earlier to $675,000... 'The primary reason is linkage
to Wall Street,' said Miller Samuel President Jonathan Miller."

Muni Watch:

April 24 - Bloomberg (Jeremy R. Cooke): "Municipal bond yields dropped the
most in three months as state and local governments sold more taxable than
tax-exempt issues this week to reap new federal subsidies on interest costs
from Build America Bonds."

Speculator Watch:

April 22 - Bloomberg (Tomoko Yamazaki and Komaki Ito): "Hedge fund redemptions
slowed in March as industry returns outperformed global benchmarks this year,
according to Eurekahedge Pte. The industry lost $136 billion in the first quarter,
shrinking 32% from a peak of $1.95 trillion at the end of June 2008, and bringing
total assets under management to $1.34 trillion, the...research firm said...
Net redemptions in March totaled $15.7 billion..."

April 20 - Bloomberg (Alexis Xydias and Lynn Thomasson): "Companies with the
most debt and lowest returns on assets are turning the biggest six-week rally
in stocks since 1938 into a bloodbath for last year's best- performing trading
strategy. Investors in so-called quantitative momentum funds... have become
this year's biggest losers... Quant momentum managers may have tumbled 27%
this month in the U.S., the most since at least 1993...according to... JPMorgan
Chase... 'Not in a million years would we have expected this gyration to be
as vicious and enduring as it has been,' Steven Solmonson, the head of Park
Place Capital Ltd., a hedge fund... said... 'The quants got whipsawed badly.'"

Crude Liquidity Watch:

April 22 - Bloomberg (Ayesha Daya): "Dubai house prices may slump as much
as 70% from their peak late last year as demand drops and banks fail to resume
mortgage lending, prompting mergers, UBS AG said. 'We are still in relatively
early stages of the property down-cycle in United Arab Emirates,' Saud Masud,
a Dubai-based analyst at the Swiss bank, wrote..."

Reflation Watch:

The Morgan Stanley Cyclical index surged 7.0% this week and has now rallied
85% off of March 6th lows. Over this period, the S&P Homebuilding index
is up 85%. The banks have rallied 95% off lows, while the Morgan Stanley Retail
index has risen 64%. I thought it made sense to take a closer look at global
reflation dynamics.

Various risk markets have traditionally provided early indicators of reflationary
dynamics. The "emerging" economies are clearly responding to the loosened global
monetary backdrop. After spiking to 10.6% last fall, Brazilian government dollar
bond yields have dropped to about 6.4%. At 6.13%, Mexico's dollar yields are
down about 350 bps from October highs. Examining the prices of Credit default
protection, after spiking above 1,100 bps in October, the cost of protecting
against a Russian default has dropped to about 380 bps. CDS (Credit default
swap) prices have dropped from 850 to 335 bps for Turkey, 640 to 450 bps for
Hungary, and from almost 700 to 290 bps for South Korea. It is worth noting
that South Korea today reported first quarter GDP growth of a positive 0.1%,
a performance thought impossible a few months ago.

A much faster-than-expected recovery appears to be unfolding in Asia. Today,
Bank of China advisor Fan Gang stated that the Chinese government's $585bn
stimulus package would help support 2009 growth in the range of between 7%
and 8%. Goldman Sachs economists this week raised their estimates of China
GDP growth to 8.3% from 6.0%. CLSA Asia-Pacific Markets increased their China
growth forecast to 7.0% from 5.5%.

Currency markets also point toward a reflationary bias. The "commodities" currencies
are among the strongest performers so far this year. The South African rand
has gained 7.7%, the Norwegian krone 6.1%, the Brazilian real 5.5%, the Mexican
peso 3.4%, the Australian dollar 2.4%, and the Canadian dollar 0.4%.

In commodities markets, industrial metals have bounced back meaningfully.
Copper has gained about 45% so far this year. Platinum has jumped 25%, with
strong gains also for lead and zinc. And let's not forget gold and silver,
with their respective year-to-date gains of % and %. Overall, the CRB commodities
index is down 2.9% y-t-d, while the Goldman Sachs Commodities index is up 5.6%.
Now, if energy markets get going...

According to Dealogic, year-to-date global M&A activity has jumped to
$449bn, a level now only 14% below comparable 2008. With PepsiCo's acquisition
of Pepsi bottling companies and Oracle's purchase of Sun Microsystems, this
past week was one of the strongest for M&A in months. Recall that first
quarter "global debt capital issuance" was up 26% year-over-year to $1.53 TN
(data from Dealogic). Asia issuance was up 55% year-on-year ($176bn). Here
at home, there was record first quarter investment grade debt issuance ($298bn).

Companies are again able to raise finance in the junk bond market. Over the
past two weeks $5.5bn of high yield bonds have been sold. It is worth noting
(citing AMG data) that high-yield funds attracted $532 million of inflows this
week, up from last week's $433 million. Notably, six-week inflows now stand
at an impressive $3.38bn. Supported by various Washington-based programs, U.S.
corporate debt issuance is on record pace.

Taking a look at U.S. debt market risk premiums, junk spreads are at the narrowest
level since last October. Investment-grade spreads are at their tightest since
February (from Merrill Lynch Credit indices). Corporate bonds have generally
performed well for investors so far this year. Muni bond yields have dropped
to the lowest level since September in what has developed into a mini municipal
issuance boom ($9.2bn issued this week inclusive of California's "Build America
Bonds").

This week, inter-bank lending risk premiums tightened to levels not seen since
before the failure of Lehman. According to Bloomberg, the "Libor-OIS" spread
has narrowed to 0.87%, down from an October high of 3.64%. We'll be learning
much more about the "stress test" over the next couple weeks. Examining financial
CDS prices, there remains extraordinary stress but apparently somewhat less
of it as it pertains to bank defaults. JPMorgan CDS prices have dropped to
about 170, down from as high as 240 bps last month. Morgan Stanley CDS is down
about 120 to 360 bps. At 245 bps, Goldman Sachs CDS is down about 130 bps from
March highs. Wells Fargo CDS is down about 60 from highs to 240 bps. The "problem
child," Citigroup, has seen its CDS prices come in a moderate 90 to a still
high 575 bps.

Monday, the U.S. Equities VIX index (expectations for future market volatility/risk)
dropped below 34 to the lowest level since the Lehman collapse. The S&P
Homebuilding Index is now up 30% for the year. The Morgan Stanley Retail Index
(35 companies) has now posted a 2009 gain of 30%. The Morgan Stanley High Tech
index is up 21% y-t-d, and the InteractiveWeek Internet index is 31% higher.

It is worth noting that the Mortgage Bankers Association weekly application
index is near the highest level since the summer of 2003. Of course, this boom
is being driven by refinancings - which are now running about double the year
ago level. Mortgage rates are these days at historic lows. As a disciplined
analyst, I cannot disregard an indicator that has many times in the past proven
its worth.

The unfolding refi boom has the potential to significantly impact systemic
reflation. For one, millions of households will be reducing their monthly mortgage
payments. Many with adjustable-rate, shorter-term, or various "exotic" mortgages
now have an opportunity to stretch things out to 30 years at quite favorable
rates. While certainly a fraction of previous inflated levels, there will be
meaningful equity extraction used to pay down higher cost debt and, perhaps
even, buy things (weekly retail sales trends have stabilized). There is also
the dynamic where holders of millions of old mortgages will receive early repayment
in a process that works to reliquefy segments of the MBS marketplace. And I'll
assume that the GSE's will increase their holdings of new MBS, perhaps creating
a significant impetus for system reflation. At the minimum, Fannie, Freddie,
and the FHA will be stamping their (I mean the taxpayers') guarantee on hundreds
of billions of MBS, creating more "money-like" debt instruments out of Wall
Street's previous "private-label" variety of (discredited) mortgage security.

It's my view that the markets generally lead the economy - not vice-versa.
If this stock market rally is sustained, I would expect the summer home selling
season to surprise on the upside in many locations. When some semblance of
confidence returns to housing markets, I would not be surprised to see some
pent up demand positively impact auto sales. Anecdotally, it appears consumer
Credit conditions are beginning to loosen - even in auto finance.

If we step back and ponder the unprecedented scope of today's global fiscal
and monetary stimulus, we shouldn't be all that surprised by the fledgling
reflationary forces observable both at home and abroad. I have labeled emerging
dynamics the "Government Finance Bubble." There is mounting evidence that this
Bubble is developing critical mass and should be taken seriously.